Tax Articles
Harmonized Tax a Boost to Ontario Business Competitiveness
Hendrik Swaneveld
Voice
April 2009
Delivering a budget on March 26 designed to stimulate the slumping economy, Ontario Finance Minister Dwight Duncan included a major boost to the competitiveness of this province’s businesses: the harmonization of the provincial sales tax (PST) with the federal goods and services tax (GST).
From July 1 next year, the 8% provincial retail sales tax will be converted to a value-added tax and blended with the 5% GST, which is also a value-added tax, to create a 13% harmonized sales tax (HST). Currently, the PST applies to many purchases made by businesses, but unlike the GST, businesses cannot claim PST as input tax credits (ITCs). This inflates the cost of production for businesses and the cost of products for consumers. The HST will enable businesses to claim sales taxes as ITCs and to pass along these savings to consumers.
Another important benefit of harmonization will be a reduced compliance burden. Sales tax returns will be combined and companies will pay a single tax to the Canada Revenue Agency (CRA) and will only be audited by this one level of government.
Ontario will join Québec, Nova Scotia, New Brunswick and Newfoundland & Labrador which have already harmonized their sales tax systems with the federal GST. For the most part, Ontario’s HST will follow the same rules as the GST.
- The CRA will collect HST of 13% on sales of eligible goods and services that are also subject to the federal GST. There will be a limited number of exemptions: children’s clothing and shoes, children’s car seats, diapers, feminine hygiene products, and books – all of which are currently exempt from Ontario retail sales tax.
- Businesses selling taxable or zero-rated goods and services will be able to claim ITCs on purchases.
- Businesses with sales under $30,000 will not be required to register and collect the HST.
- Public service bodies with revenues under $50,000 will not be required to register and collect the HST. In order to ensure that tax harmonization will be fiscally neutral for this sector, public service entities above this threshold will be able to claim rebates for the provincial portion of the harmonized tax.
To help small businesses cover some of the costs of transitioning to new accounting and point-of-sale systems, the government is also providing a credit of up to $1,000 for most enterprises with annual taxable revenue of less than $2 million.
The Finance Minister promised that tax harmonization will be fiscally neutral overall; thus some of the revenue it generates will help to fund a corporate tax reduction package.
- Beginning July 1, 2010, corporate income tax rates will be gradually reduced from 14% (12% for manufacturers) to 10% by 2013.
- The small business deduction surtax of 4.25% charged on taxable income above $500,000 will be eliminated on July 1, 2010.
- Application of the corporate minimum tax (CMT) will be eased for taxation years ending after June 30, 2010. Corporations (or associated groups) with total assets of less than $50 million or total revenue of less than $100 million will no longer be subject to CMT. And, for those corporations that do remain subject to CMT, the rate will fall from 4% to 2.7%.
Unfortunately, there is also a downside to harmonized taxes for certain businesses.
Firms that sell services to consumers or other businesses, for example, will be required to charge HST at 13%, whereas they currently only charge 5% GST. These businesses range from financial advisors, to engineers, contractors, hair stylists, dry cleaners and taxi drivers. Subscriptions and memberships will also be subject to 13% HST.
Builders of new homes will also face negative repercussions. While builders currently pay retail sales tax on materials used in constructing houses and condominiums, buyers do not pay retail sales tax on the purchase price of the home. The new harmonized tax will mean the cost to construct a new home will be lower because builders will be able to claim ITCs for sales tax on materials, but the sale price of the home will be subject to an additional 8% tax.
While the Ontario government proposes to make the transition to the HST fiscally neutral for homes under $400,000 by providing a rebate of 75% of the provincial portion of the tax (which reduces it from 8% to 6%), this rebate is gradually phased out above this price until it is eliminated at $500,000. Thus homes that sell above $400,000 will be subject to higher rates of tax; those that sell above $500,000 will be subject to an additional 6% tax.
Insurance companies and financial institutions will likely experience significant cost increases under harmonization. While they will be exempt from charging HST, just as they are currently exempt from charging GST because they sell primarily tax-exempt services, they will not be able to claim ITCs on expenditures for these services. Thus the tax costs of these services will rise from 5% to 13%. Moreover, Ontario will continue to impose an 8% sales tax on insurance premiums that are currently subject to this tax. This includes most types of insurance, except automobile premiums.
As well, large businesses will not immediately realize the benefits of the HST. Those with annual taxable sales above $10 million will have a temporary five-year restriction, followed by a three-year phase-in period, to claim ITCs for certain expenditures. These include food, beverages, entertainment, telecommunications (except Internet access or toll-free numbers), road vehicles weighing less than 3,000 kilograms and related fuel, and energy (except when used for farming or producing goods for sale).
While details will follow in the coming months, following are some strategies Ontario business owners might want to consider.
- Evaluate the impact of the harmonized sales tax on costing and pricing.
- Assess the tax impact related to inter-provincial sales, central purchasing and importing goods.
- Identify the changes required to convert point-of-sale and accounting systems to charge, collect and remit HST and to collect ITCs.
- Review the timing of planned expenditures and capital acquisitions.
- Consider the HST impact on contracts, including leases, credit notes, agreements and discount coupons.
For most Ontario businesses, harmonization means tax savings that can be reinvested to enhance competitiveness. Now’s the time to determine how to optimize these advantages for your business.
Hendrik Swaneveld is a partner of BDO Dunwoody LLP (www.bdo.ca), specializing in commodity taxes and transfer pricing. You can reach Hendrik in the Markham office at (905) 946-2509 or hswaneveld@bdo.ca.
